Usage of software as a service (SaaS) is still on the rise, and the market will jump from $2.3 billion worldwide in 2003 to $8.0 billion by 2007, a 28 percent five-year CAGR, according to IDC. The research firm, which today released "Top 10 Predictions for 2006: Software as a Service," foresees expansion of the role of on-demand and hosted application management (AM) in the United States software market.
"The role of SaaS delivery in the software industry continues to grow. Traditional software players have recognized the importance of SaaS and numerous SaaS-focused companies are emerging in the marketplace," writes Erin Traudt, a research analyst for IDC's software as a service research program and author of the study.
IDC projects a continuing increase in mergers, acquisitions, and partnerships in the upcoming year. Traudt explains that this trend is a product of overall growth. "Current SaaS adoption is just the tip of the iceberg, leaving plenty of room for providers and partners."
The reason for increased partnership lies in acceptance, Traudt says. "Until recently, sales channels for on-demand software solutions have been almost 100 percent direct," Traudt says. "Now that the emerging delivery model has gained traction, momentum, and validation in the industry, IDC believes that an increase in formalized partnerships and relationships will occur between on-demand providers themselves as well as with hardware vendors, telecommunications companies, business process outsourcers (BPOs), systems integrators, SaaS aggregators, distribution channels, and SaaS enablers."
While the study indicates an increase in all aspects of SaaS, the focus will turn from hosted AM, in which a company hosts commercially available software over the Internet, to software on demand, in which a provider installs one copy of a network-accessible application to be used specifically for SaaS. IDC projects that this movement will include the development of ecosystems to expand on-demand and that the larger independent software vendors will create on-demand versions of preexisting products.
Traudt indicates this advance was due to a more customer driven market. As SaaS providers look to improve their offerings and heighten revenue, she says, "customer demand will play an integral role in fueling the development of SaaS solutions and ecosystems."
IDC Top 10 Predictions for SaaS:

Large ISVs will spin off on-demand versions of products

Small and medium enterprises will remain a "tough nut to crack"

Microsoft will strengthen SaaS resolve

Software on-demand providers will focus on partnering

Miniecosystems will emerge to extend the reach of software on demand

SaaS enablers will continue to aid availability of on-demand offerings

Merger and acquisition activity will continue

SaaS providers will concentrate on improving offerings and customer service